Foreign lenders to get larger share in sector financing

Public sector banks (PSBs) have put the brakes on extra credit limits to gems and jewellery (G&J) units as Export Credit Guarantee Corp of India Ltd (ECGC) has clamped restrictions on giving additional risk cover on this portfolio. Officials of some PSBs said some banks had put internal restrictions on granting additional limits to the G&J sector from the beginning of this month.

Consequently, foreign banks involved in diamond sector financing are set to gain a larger market share (incrementally) in India, said Anup Zaveri, convener, banking, insurance and taxation committee of the Gems and Jewellery Export Promotion Council (GJEPC), and partner of the jewellery company Polar Star.

Currently, three foreign banks - Antwerp Diamond Bank, Royal Bank of Scotland and Standard Chartered Bank - have exposures of $200 million, $710 million and $280 million, respectively, in the Indian market. While the promoters of Antwerp Diamond are looking out for sale, others may gain incremental market share exponentially in India.

Foreign banks do not use ECGC insurance. They have different arrangements to cover risks and will pick up business, Zaveri added.

If the lack of adequate cover impacts the flow of funds from PSBs, units could tap foreign banks for credit limits, said a banking sector analyst.

State Bank of India is the largest domestic lender to the G&J sector with an exposure of about Rs 11,000 crore. Indian banks have already been cautious in lending to G&J units due to a sharp rise in defaults in the aftermath of the 2008 financial crisis.

Without an adequate risk cover on the G&J loan portfolio, public sector banks will face limitations to take additional exposure.

ECGC said it had not stopped giving cover to the G&J industry. It has to operate within norms (for sector and single exporter limits) set out by the Insurance Regulatory and Development Authority. ECGC is in the process of reviewing internal guidelines, said Rohit Pandya, its general manager.

The pace of bank lending to the G&J sector has slowed down to 19.2 per cent in February 2013 from 28.5 per cent a year ago. The outstanding exposure was Rs 58,400 crore in February 2013, according to the Reserve Bank of India.